On the face of it, there was a lot to like in this mornings interim results from Quindell (LSE: QPP).
Sales up 118% to 364.2m.
Pre-tax profits up 292% to 153.7m.
Cash generation of 220m.
To top it all off, Quindell share trade on a crazily low 2014 forecast P/E of just 3.5!
So why did Quindells share price fall steadily when the markets opened?
Lets start with a closer look at Quindells profits. During the first half of this year, Quindell reported adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) of 156m.
Of this, 101m (65%) came from Quindells Legal Services division, which handles compensation claims, while a further 14.2m (9.1%) came from its Health Services operations, most of which are linked to the personal injury claims handled by Quindells legal services division.
In other words, 74% of Quindells profits were derived from compensation claims during the first half of this year, making it clear that this is currently Quindells main line of business. This is a cause for concern for some investors, who question its sustainability.
The remainder of the firms profits came from its Digital Services division, which includes the firms motor insurance telematics business, where EBITDA rose by 250% compared to the same period last year.
However, Quindell didnt address recent concerns about its large telematics deal with the RAC, instead simply stating that certain contracts are being restructured another warning flag.
What about cash generation?
Quindell has been criticised for its lack of cash generation in the past, and seems to be working hard to fix this.
Cash generation during the first half was 220m, which the firm says represents 80% of receivables at the end of 2013, excluding noise-induced hearing loss cases, which are a new growth area this year.
However, despite improved cash generation, the influx of new business seen during the first half means that Quindells receivables rose to 560m at the end of June, up by 71% from 327m at the end of 2013.
Quindell said today that it has never written down any significant amount of receivables, but such a large increase may raise concerns that not all of this money will be recoverable.
Should you buy it?
The problem for Quindell is that the market just isnt buying the firms story, despite the apparent progress signalled in todays results.
Going against such a distressed valuation takes a strong nerve.
The eventual profits could be massive, but Quindell shares could also become worthless, if the firm’s detractors are proved to be correct.
It’s a personal decision — but if you’re still unsure, I’d recommend a look at “Ten Steps To Making A Million In The Markets“, an exclusive wealth report from the Motley Fool, which sets out a simple 10-step process that could help you build a million-pound portfolio with surprising speed.
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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.